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Shares of American Airlines (NASDAQ: AAL) plunged to a new 52-week low last week as rising trade tensions and fears of a global economic slowdown roiled the stock market.
Its Friday closing price of $27.23 was less than six times American Airlines' projected 2019 earnings. Other than a brief period of panic in mid-2016 following the U.K.'s vote in favor of Brexit, American Airlines stock hadn't fallen below $30 since shortly after its late-2013 merger with US Airways.
American Airlines Stock Performance, data by YCharts.
To be sure, American Airlines faces serious threats, including stubbornly high costs; massive debt, pension, and lease liabilities; and continuing labor unrest. Nevertheless, investors may be underestimating the ability of the world's largest airline to bounce back from its current challenges.
Global economic turmoil: Bad for American, worse for its rivals
Slowing economic growth and rising tariffs threaten the profits of global businesses. Lower profits could, in turn, encourage companies to save money by cutting back on discretionary business travel. The weakening of international trade relationships could have a particularly large impact on long-haul international travel. All of this explains why investors have sent the shares of global airlines like American Airlines lower recently.
That said, American Airlines has a smaller footprint in China -- and Asia more broadly -- than its two main rivals, particularly after the cutbacks it implemented last year. Furthermore, American gets 73% of its passenger revenue from the domestic market, compared to 71% for Delta Air Lines and about 62% for United Continental. Thus, an extended trade war with China might not hurt American Airlines as much as its competitors.
Meanwhile, trade tensions and fears of an economic slowdown have sent oil prices tumbling. Crude prices have fallen by more than $10 per barrel since late April -- with most of that drop coming in the last two weeks -- following sharp increases in the first several months of 2019.
A $650 million increase in the carrier's full-year fuel cost estimate was one big factor driving American Airlines' April guidance cut. (The company reduced its EPS forecast from a $5.50 to $7.50 range to a $4 to $6 range at that time.) Yet jet fuel prices are now slightly lower than when it made its initial forecast in late January. That could offset some deterioration in the revenue environment.
Of course, there's no guarantee that fuel cost savings will outweigh the impact of a slowdown on unit revenue. However, the U.S. economy still seems quite strong, which should limit the near-term risk of a big drop in unit revenue, whereas the fuel cost savings are already flowing through to American Airlines' bottom line.